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ISM Manufacturing Index – Backlog Drawdown Sends Warning

Written by admin | Oct, 3, 2012

ism-pmi-vs-sp500-100211This morning’s release of the Institute of Supply Management Manufacturing Index gave the bullish crowd a reason to be happy as the index ticked up from near contraction territory of 50.6 last month to 51.6 for September.   However, during any decline there will be upticks along the way as seasonal factors take hold.   While employment and production picked up; new orders remained flat.  The employment component rose two full points to 53.8 to indicate a tangible increase in hiring which bodes well for the employment report and is in line with the same increase in production which rose roughly 2-1/2 points to 51.2.

Unfortunately the bad news for the report remains in the new orders index which remained under 50 for a third month in a row at 49.6.  The slowing of demand is important as it doesn’t bode well for a stronger economic recovery in the coming months.   Furthermore, manufacturers have been chewing through back orders in recent months and continued to do so in September as backlog orders fell 4-1/2 points to a 41.5 level that indicates sizable contraction.

There is not a lot to read into this report other than it is a one month number in an index that is both volatile in nature and in a very persistent downtrend.  The year-over-year change in the index has a fairly high correlation with the S&P 500 year-over-year change so the negative trends in the ISM index don’t give much support to stock market bulls.  

All indications remain that we will be in a recession by the end of this year or early 2012.   While the market is extremely oversold and likely to witness a bounce into the end of the year that will excite the stock bulls – history says it will be a “suckers rally” that should be sold into.

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